Optimal Risk Adjustment in Markets with Adverse Selection : An Application to Managed Care

  title={Optimal Risk Adjustment in Markets with Adverse Selection : An Application to Managed Care},
  author={Jacob Glazer and Thomas G. McGuire},
It is well known that adverse selection causes distortions in contracts in markets with asymmetric information. Taxing inefficient contracts and subsidizing the efficient ones can improve market outcomes (Bruce C. Greenwald and Joseph E. Stiglitz, 1986), although regulators rarely seem to implement tax and subsidy schemes with adverse-selection motives in mind. Contracts are often complex and "incomplete," and it is the "inefficient" elements of the contract that are difficult to verify and… CONTINUE READING
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